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The Union Budget 2022-2023 states that 30% tax will be levied on income from digital assets. This will likely raise questions among crypto traders and crypto exchanges in the country, including in Tamil Nadu where there is a sizeable crypto community. In addition, will it in any way help stop fraud being carried out in the name of cryptocurrencies? In early January, the Enforcement Directorate through the Crime Branch conducted raids in several southern states including Tamil Nadu where a scam involved false promises to the public who were told that they could invest to buy ‘Morris coin’. Of note, Morris coin is a cryptocurrency developed by blockchain technology, but it cannot be traded as it is not listed on any crypto exchange. Moreover, cryptocurrency values are prone to fluctuations worldwide. In the meantime, the new digital assets tax in India would serve to remove uncertainty in the community of cryptocurrency traders, says Ishan Roy, Head of the Blockchain initiative at the Centre of Excellence for Emerging Technologies (CEET), Tamil Nadu e-Governance Agency. Asma Masood spoke to him for Inmathi.
What does the tax on digital assets proposed in the Union Budget mean?
Many applications perform crypto-to-crypto transactions. For instance, there are applications where one cryptocurrency is changed to another, or when an online gamer is awarded a non-fungible token (NFT). A cryptocurrency can also be changed into another at a crypto exchange.
The budget speech said that a 30% tax will be charged on all crypto transactions. A little confusion prevails as to what transactions come under this tax umbrella. There are widely debated assumptions circulating among crypto community members that the 30% tax would be deducted when a crypto-to-fiat transaction is made. That is, when someone sends a crypto and receives a fiat (traditional currency such as Indian rupee or US dollar, which is printed or regulated by a central bank). Some observers are assuming that the 30% tax applies to the amount obtained when converting a received crypto into a fiat.
There are two aspects with regard to the new tax proposal. Firstly, it means cryptocurrency now comes under a semi-legal umbrella. The finance secretary’s statement conveys that cryptocurrency is not illegal. However, a grey area still remains. So, crypto can be seen as having semi-legal status. This is a win for the crypto community given that crypto exchanges will henceforth have to follow some regulations, which is better than the previously existing uncertainty. Earlier, statements by a government or certain individuals could make Bitcoin crash. The value of Bitcoin used to rise if a high court or supreme court defended crypto. But now there will be less volatility, due to the degree of certainty brought in.
For whales (crypto traders who hold large amounts of cryptocurrency such as Bitcoin), the 30% tax is a large amount. It is yet to be seen whether some large traders will move their assets from Indian currency to overseas currency or to private wallets. In the meantime, the tax regulation reflects less uncertainty for small traders.
Even before the new tax came in, one had to pay a significantly large fee even to buy a Bitcoin. They are already used to dealing with large costs. But the trading volume may come down, given that if a crypto trader is buying and selling cryptos on a daily basis, then a 30% tax has to be paid every time.
You had mentioned that the tax could perhaps apply to NFTs received by online gamers. Does this mean the new regulation could potentially impact the online gaming industry?
I am indeed assuming NFTs would fall under the new tax umbrella. If so, the tax would have a bigger impact on NFTs because these have come to have a life of their own outside of crypto currency or even blockchain as well. Bollywood and Tollywood, as well as the Chennai City Football Club are venturing into NFTs. I am not saying that a purchase of NFTs may be taxed. But if you have an NFT in your wallet and you sell it then I think the receiver may have to pay 30% tax. In that sense, there may be ups or downs in the NFT markets as it is largely based on speculation. If I am charging for an NFT, then I may add a 30% charge on account of the tax I would have to pay.
Would this tax dissuade persons from venturing into crypto ecosystems?
I am not sure. Not many know how to enter crypto. Those who are already there know there can be uncertain costs involved. Even before the new tax came in, one had to pay a significantly large fee even to buy a Bitcoin. They are already used to dealing with large costs. But the trading volume may come down, given that if a crypto trader is buying and selling cryptos on a daily basis, then a 30% tax has to be paid every time. However, I do not see it deterring people from entering into cryptocurrency mining or trade. Nevertheless, crypto users may hold on (to digital assets) longer as they may see them as an investment.
When a government invests in a technology like this (by issuing digital rupee through RBI), for solving a very core problem, it means we will see a lot of investments from startups and venture capitalists investing in companies working in India. From that point of view, having an RBI digital currency is a good move for the crypto community, as it can make India a hub for blockchain technology. India is already there, but there can be renewed interest because of the new tax announcement.
How would digital assets like cryptocurrency and NFTs be taxed since they are blockchain-based and it is hard to pin down the owner of the digital assets, unless they purchased the bitcoin on a KYC platform? Besides, theoretically, even an AI entity could participate in blockchain.
That could be one way of approaching it. In a way, you are basically right that no one can trace a sender or receiver. But most of the large Indian exchanges perform KYC. They get your PAN and other information. Hypothetically, they can use analytics to figure out where the transaction is going, from one wallet to another. Vast research is being done on crypto transactions with regard to tracing, for example in the case of ransomware attacks. A lot of work has been done in this area but not as much as would be required to roll out regulation at this level. But artificial intelligence (AI) and data analytics can be used to implement taxation and regulation.
How does all this tie in with the budget announcement of an RBI digital currency?
I cannot comment if this linked or separate from cryptocurrency. However, if it is separate, then it is a very encouraging announcement because it shows the support of the Indian government in this aspect. While UPI (unified payments interface) is still used in retail transactions and is a robust platform, blockchain may not be able to compete with UPI’s efficiency. On the other hand, there is scope to bring in more efficiency via digital currency in central bank-to-bank or bank-to-bank transactions. Obviously, when a government invests in a technology like this, for solving a very core problem, it means we will see a lot of investments in startups from venture capitalists investing in companies working in India. From that point of view, it’s a good move for the crypto community, as it can make India a hub for blockchain technology. India is already there, but there can be renewed interest because of the new tax announcement.
If you have one Indian cryptocurrency it will probably be linked to one rupee or hundred rupees, that is, it will not fluctuate in price. But a lot of people are buying cryptocurrencies because they look to make a profit if the price increases.
On the question of how the digital rupee could be linked to cryptocurrency—outside of speculation, cryptocurrency could have several benefits over traditional fiat currency. For example, DeFi (Decentralized Finance) allows transfer of liabilities across different protocols in a flash. We could probably see such developments occurring with regular currency. Therefore, the fintech sector could become more robust, with more innovative products. These benefits could move from the crypto world to the Indian rupee world as well.
I am not sure if it will dissuade the crypto realm, because if one is investing in crypto currency for speculation, then it cannot be done with the Indian rupee, because the Indian rupee will probably be a stable coin. For example, if you have one Indian cryptocurrency it will probably be linked to one rupee or hundred rupees, that is, it will not fluctuate in price. But a lot of people are buying cryptocurrencies because they look to make a profit if the price increases.
Secondly, in the case of those investing in crypto for the technology, I do not see the Indian rupee deterring such investors. This is because the startup space and the non-regulated space are where innovations will happen faster, because the Indian rupee will have to look at strong monetary policy and other aspects before it can reach the level of innovation that cryptos have. So, I do not see the digital rupee being linked to cryptocurrency or as a deterrent to cryptos.
What would be your view on the new law with respect to crypto traders in Tamil Nadu? How would regulation help or harm the digital currency trade?
Many technology and fintech companies are present in Tamil Nadu. As crypto has now been accorded semi-legal status in India (with the announcement of digital tax in the Budget), we may see these fintech companies take an interest in blockchain and crypto, as to how they can be brought into enterprise solutions. One negative aspect is that it may dissuade one (individual or company) if they are looking to use cryptocurrency to buy or sell virtual art, or for a non-trading application. They will think twice before going on to implement their application, as their view would be that the objective of the application is not for customers to buy or sell cryptocurrencies but 30% tax still has to be paid. So, there is a possibility of a negative impact in Tamil Nadu given that there are several (non-trading) blockchain companies in Chennai.
If, like China, India bans cryptocurrencies and imposes only the proposed digital rupee, it would be a negative step for the country. Because with cryptocurrency, the country for probably the first time is making its way in leading in a technology. Otherwise we are always playing catch-up with the world in other technologies like AI, machine-learning or drones.
What would happen in case a future development occurs in India similar to the Chinese ban on cryptocurrencies?
China has fully shut down cryptocurrencies and is promoting the digital yuan. The Chinese government can track everyone using the digital yuan, as the authorities have access to user data, the ledger and where users are spending the money. I am hoping, given that India is a more democratic country, that we will not see a blanket imposition of the digital rupee similar to the scenario with the digital yuan. I cannot comment if there could be a ban in India on cryptocurrencies as things are not clear on that front. However, such a move would be a negative step for India. Because with cryptocurrency, the country for probably the first time is making its way in leading in a technology. Otherwise we are always playing catch-up with the world in other technologies like AI, machine-learning or drones. Many large Indian blockchain companies such as Polygon are gaining notice outside the country, with many customers abroad. If a complete crypto ban occurs, we would lose out on an advantage which we have over the world.
Do you see any public-private partnerships possibly arising in the initiatives being undertaken by the TN e-Governance Agency’s Blockchain department? If so, would there be any possible impact from the new digital assets tax?
We do not plan to implement cryptocurrency in our platform right now, because the underlying technologies such as UPI, which is robust, have more benefit in e-governance. Partnerships have been made with some private vendors after a tender process. The TN blockchain strategy document describes how the state plans to build a sandbox and give dedicated access to many startups and private companies on this platform where they can build applications. For example, they can build applications using the sandbox platform for the private sector. This can help citizens of Tamil Nadu. It is definitely part of our long-term plan.
(The views expressed in this interview are personal.)
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